One thing that bugs me about Libertarians (and many libertarians) is their
fetish for gold. Megan McArdle takes a shot at explaining some of the things
that bug me (economically) about the gold standard
here and
here. In particular, the gold standard seems to be a solution for a symptom
instead of the underlying disease. That disease, of course, being, an
untrustworthy government. As Megan says:

"In short, you don't get anything out of a gold standard that you
didn't bring with you. If your government is a credible steward of the money
supply, you don't need it; and if it isn't, it won't be able to stay on it
long anyway. (See Argentina's dollar peg). Meanwhile, the limitations on the
government's ability to respond to fiscal crises, the necessity of defending
against speculative attacks in times of crises, and the possibility of
independent changes in the relative price of gold, make your economy more
unstable."

But I have another problem with the gold standard. How are you going to
implement it? First of all, there's no way today that the economy will work on
actual coins of intrinsic worth. At what appears to be a value for gold of
almost $900/oz troy, a dollar coin would have to be almost all base metal
anyway. Figuratively, it would have "the density of gold in seawater". The last
few attempts we've had at fiat dollar coins haven't taken off anyway, and at any
rate, the amount of "money" in just the US economy is mostly virtual anyway. So
we're still looking at an economy where the vast majority of transactions are
book-keeping, with a small amount of tokenized money. But the book-keeping and
tokenized money must match up to an amount of gold in someone's hands.

Per the US Mint, there is
147.3 million ounces of gold in Fort Knox, at a book value of $42.22 per
ounce. So the government says they have (147.3 * 10^6) * $42.22 = $6,219,006,000
- in round numbers $6.2 billion. That's not a lot of money - per
Forbes "The Worlds Billionaires" Bill Gates has an estimated net worth of
$56.0 billion, almost ten times this value. Per the
CIA World Factbook, the population of the USA is 301,139,947 as of July 2007
- if we divide this out, we get a value of $ 20.65 or so per man, woman, and
child in the US, more or less. (the CIA does not specify if this is citizens or
inhabitants). Now, that book value is highly misleading, since the spot price for
gold is $885.00 as of this writing (source).
That changes the value to be $130,360,500,000 - $130.3 billion in round numbers.
Bill Gates is still worth half of the US Federal Gold Reserves, and the per
capita value is a fraction over $432.89.

In a gold-backed economy, you can't have more money outstanding than there is
gold to redeem it with. Otherwise, how is it a gold-backed economy? But the US
money supply is at least $1.37 trillion if you only include the
physical currency plus exchangeable reserves (M0). If you measure M2
(essentially all the cash, exchangeable reserves, checking, saving, money market
accounts, and CDs less than $100,000) it is about $7.02 trillion. (Source
is Wikipedia - see for a
somewhat more rigorous definition of M2. If you have better numbers, by all
means comment, but Wikipedia's sources are the government). That's anywhere for
ten times to seventy times the value of the gold in Fort Knox at market
rates. To go to a gold-based economy, you have to devalue the entire US money
supply by a minimum of a factor of 10. 90% of the value of the money
in the economy, gone. And you can't fix this by renominating the money supply -
if you declare that the Newdollar is worth 10 old dollars, an ounce of gold is
only worth $88.50 in Newdollars.

Even if you somehow managed to back the money with all the refined and
available gold in the world (some 120,000 to 140,000 tonnes per
this
website,
Wikipedia has a slightly higher figure, sourcing the World Gold Council) it
would still only be worth around $1.8 trillion (probably a bit more, the number
I used for the price of gold is about 30% higher; based on our relative valuing
of the Fort Knox gold). And then you would have no gold left over for
non-monetary uses; essentially, almost every known ounce of gold would have to
be stored in Fort Knox to account for just the amount of US paper money in
circulation; with little left over for other uses. It still doesn't cover all
the money on deposit in the US banking system.

Finally, a question for all of you out there in favor of the Gold Standard.
How many of you believe the government when they say there's 147.3 million
ounces of gold in Fort Knox? As I went to research the numbers for this post, I
stumbled onto the persistent belief that the US Government has (usually for
nefarious reasons) moved all the gold out of Fort Knox and either sold it or
used it as collateral for some scheme or other. The very first hit for the
search string
"how much gold in fort knox" entertains this possibility, as does the
Wikipedia entry on
United
States Bullion Depository. If you believe this tale, how can you trust the
government to keep up a gold standard?

Plus, remember why the US rather suddenly needed a gold repository in
1933 - FDR and the US Congress declared private ownership of gold to be illegal.
That would be one way for the government to make up the shortfall of gold to run
the economy on - to confiscate the gold again. Except, there isn't enough.

In short, we cannot afford a gold standard, it would be too confining
of the economy. There is not enough gold in the world to implement a gold
standard for the US, much less in the government's reserves. There is no
reasonable way in the short term to change this. And if there ever is a way to
have to have the 1.5 gigatonnes of gold minimum that the US would need, it would
be worth that much less because of the expansion of the gold supply. Now if
someone would only tell Ron Paul this...